Brazil Default Rate at 30-Month High Raises Doubt on Economy

Brazil’s consumer loan default rate rose to the highest in 30 months, reinforcing concerns that households struggling with debt could further dent Brazil’s credit-driven growth model.

The consumer default rate in May rose to 8 percent, from a revised 7.8 percent in April, the central bank said in a report distributed today in Brasilia. The default rate on company loans remained unchanged at 4.1 percent.

“This does not bode well for economic recovery,” John Welch, macro strategist at CIBC World Markets, the investment-banking branch of Canada’s fifth-largest bank, said by telephone from Sao Paulo. “Bringing down interest rates and pushing credit won’t lead people to borrow more, they’ll just refinance their loans.”

In just over a month, analysts have shaved more than one percentage point off their 2012 growth estimate for Brazil, lowering it to 2.18 percent, according to a central bank survey released yesterday. Economists predict the second-biggest emerging market after China will slow for a second straight year even as the government has cut interest rates to a record low, granted tax breaks on industrial and consumer goods and provided more subsidized credit. The economy grew 2.7 percent last year after expanding 7.5 percent in 2010.

Auto Sales

Retail sales in April slowed to 6 percent from a year earlier, compared with 12.5 percent in March. Auto sales plunged 11 percent in April as lenders restricted new credit amid rising default rates on car loans. In May vehicle sales bounced back 11.5 percent following tax breaks.

Lower lending rates helped fuel a credit expansion of 1.7 percent from the previous month, compared to a revised 1.3 percent growth in April. Outstanding credit rose 18.3 percent in May from a year earlier to 2.14 trillion reais ($1.03 trillion), the central bank said.

Credit Expansion

A Bank of International Settlements report published June 24 warned that credit expansion in Brazil and other emerging markets “far outpaced” economic growth in recent years and that “high debt levels could be a problem.” Rapidly expanding credit also “raises questions about the sustainability of bank performance,” the BIS said in the report published on its website.

The BIS report painted an incomplete picture of Brazil’s credit situation, Tulio Maciel, head of the bank’s economic research department, told reporters in Brasilia today. The central bank sees default rates falling toward the end of this year as lower interest rates, rising wages, and low unemployment bolster household income, Maciel said. “There’s no risk with credit growth in Brazil,” he added.

The percentage of overdue loans will fall when a crop of bad quality car loans granted in 2010 mature, Maciel said. Stimulus measures granted in May to fuel vehicle sales will not erode credit quality because banks have become more selective since last year. “There’s been a learning process,” Maciel said.

The average interest rate charged on consumer loans fell to 38.8 percent from 41.8 percent in May, the central bank said. The average rate on company loans declined to 25 percent from 26.3 percent. Those rates fell further for June 1-14 to 37.6 percent for personal loans and 23.8 percent for corporate loans, Maciel said.

Since August, President Dilma Rousseff’s administration has reduced the overnight rate by 400 basis points. Policy makers will cut the benchmark Selic rate to 8 percent at their July meeting, according to the central bank survey. Traders are wagering that policy makers will cut the rate to at least 7.75 percent by August, according to Bloomberg estimates based on interest rate futures contracts.

Brazil’s consumer confidence index fell for the second straight month in June from a record high in April, according to the Getulio Vargas Foundation.

The yield on the interest-rate futures contract maturing in January 2014, the most traded in Sao Paulo today, fell five basis points, or 0.05 percentage point, to 7.9 percent at 2:44 p.m. local time. The real weakened 0.5 percent to 2.0731 per dollar.

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